Analyst Conference Summary

conference date: January 21, 2021 @ 1:30 PM Pacific Time
for quarter ending: December 31, 2020 (fourth quarter, Q4 2020)

Forward-looking statements

Overview: Rough quarter impacted by pandemic, slight y/y revenue growth, slight decrease in systems shipped.

Basic data (GAAP):

Revenue was $1.33 billion, up 23% sequentially from $1.08 billion and up 4% from $1.28 billion in the year-earlier quarter.

Net income was $365 million, up 16% sequentially from $314 million, and up 2% from $358 million year-earlier.

EPS (earnings per share, diluted) were $3.02, up 16% sequentially from $2.60 and up 1% from $2.99 year-earlier.

Guidance:

No procedure guidance due to unpredictable nature of the pandemic. Reset of hospital capital budgets for 2021 is an unknown. But R&D spending will grow at a faster rate than in 2020; same for SG&A.

Conference Highlights:

CEO Gary Guthart said, "Our fourth quarter capped a year in which the pandemic impacted our customers ... We placed 936 systems in 2020. . . After the summer our customers returned to more routine use of our systems." The resurgence of the pandemic could be a problem both for diagnostic procedures and for surgeries. Future new systems installs are sensitive to utilization rates.

Global procedures grew 6% y/y, showing continuing disruption by the pandemic. But making progress in Asian nations, with China becoming the number 2 procedure market. Procedure growth was impacted in Q4 by a resurgence of the pandemic, particularly in California, particularly late in the quarter.

Ion shipped 4 systems in the quarter. Adoption of newly launched products like staplers and sealers has been strong.

Revenue from Da Vinci system sales was $367 million, up sequentially from $268 million and down 12% y/y from $416 million. 326 systems shipped, up sequentially from 195, and down 3% from 336 year-earlier, including 37% leased systems. About 50% of sales involved trade-ins. Average system price of $1.43 million. Installed base is now 5989 systems, up 7% y/y. 13 systems shipped to China. 130 system outside U.S. total.

Revenue from instruments and accessories was $747 million, up sequentially from $631 million, and up 11% y/y from $671 million. $2,060 per procedure up y/y. Procedures per system declined 2% y/y. An extended use instrument program was introduced in October 2020, which should help customers cut costs. That will negatively impact revenue short term, but help grow the market longer-term.

Revenue from services was $367 million, up sequentially from $179 million and down 12% from $416 million year-earier.

Non-GAAP numbers: Net income was $434 million, down sequentially from $344 million and up 4% from $417 million year-earlier. Non-GAAP EPS was $3.58, up sequentially from $2.77, and up 3% from $3.48 year-earlier. Non-GAAP numbers exclude trade out revenues and stock-based compensation.

The cash and equivalents balance ended at $6.87 billion, up sequentially from $6.4 billion. There is no debt. Repurchased $34 million of shares, and has $1.7 billion remaining authorized.

Cost of revenue was $433 million, leaving gross profit of $896 million. Operating expenses of $480 million included: $330 million for selling, general, and administrative; $150 million for research and development. Leaving income from operations of $416 million. Interest and other income was $21 million. Income tax $73 million. Income attributed to non-controlling interest $2 million.

Q&A:

Hospital capital spending? We think there was some budget flushing at the end of 2021, we don't know how much could overflow into 2020. Large customers were expressing confidence. The caution is there is temporary excess capacity in the field. Forecasting timing is hard.

Engagement feedback? We are showing the value of the programs, but may not result in increased revenues immediately. Some things like Iris will not bring huge revenues, but some revenue and strengthen the ecosystem and accelerate adoption.

Op ex going to grow faster than sales in 2021? It comes down to unpredictable COVID impacts. In 2020 some expenses decreased, like travel, while others like research increased. It is just very difficult to predict revenue and procedures at this point.

First quarter procedures so far? In Q4 California procedures went from growth in October to reduction in December. Those trends continued into January.

We are excited about the long-term prospects in China. But it is a complicated marketplace, with the government setting quotas on systems. Also Chinese companies would like to field competitive systems.

Ion future indications? We are focussed on our first indication. We have outstandign results in branchoscopy. We think there are longer term indications, including ablation technologies.

Competitive landscape, what is on the market, J&J? Internationally it is not robot v. robot for customers, but ecosystems driving outcomes. Some customers will try new things. Nothing surprising so far. Some bigger players may try to bundle to entice customers. We are not commoditized.

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